SUN-Apollo holds 20% stake in Rustomjee’s holding firm Keystone Realtors for which it has paid Rs 234.9cr in 2009.

The Company Law Board (CLB) has dismissed an ad-interim petition filed by the realty investment firm SUN-Apollo against Mumbai-based developer Rustomjee Group and has asked both the parties to undergo arbitration as defined in their shareholders’ agreement clause, in an order issued on Oct 12.

In a transaction gone sour, SUN-Apollo had invested Rs 234.9 crore (out of the proposed sum of approximately Rs 300 crore) in Rustomjee Group’s holding company Keystone Realtors over three years ago.

Earlier this year, the real estate-focused fund’s two associate companies, Mausmi SA Investments LLC Private Equity fund based in Mauritius and Cyprus-based Mausmi Ventures, had filed a case against the developer, alleging fraud, misutilisation of funds and default in payment of interest, among others violations, as per the shareholders’ agreement.

SUN-Apollo got an interim relief on Aug 8 after a petition to CLB. However, Rustomjee appealed against this and it was set aside by the Bombay High Court, which also ordered the CLB to hear the ad-interim application while advising Rustomjee not to create third-party rights without the permission of the High Court on FSI sales in Virar in Mumbai.

Anand Desai, managing partner at DSK Legal, the advisor to SUN-Apollo, told VCCircle, “We will be appealing to the high court against the CLB order within the next 10 days.”

Boman Irani, CMD of Rustomjee Group, said, “We have extended our full support to all our investors and co-operated in the proceedings of the honourable CLB.”

The private equity fund owns 539 shares of Keystone Realtors, representing 20 per cent stake in the company. Mausmi also held 167 Series A compulsory convertible debentures (CCDs) and 1,160 Series C CCDs of the holding firm. The transaction was intermediated by Kotak Mahindra.

CLB judicial member AK Tripathi, while dismissing the case, also noted that the relationship between both parties was cordial till the end of 2011 but thereafter, the differences appeared. He also added that the dispute between both parties lies in “the quantum of amount” in returns.

The dispute has once again shown the flashlight for such deals in the realty space as the Reserve Bank of India has been against such put options, giving assured returns to investors in real estate in the garb of an equity transaction.

In the case of SUN-Apollo-Rustomjee, the agreement provided for an exit option through an initial public offer, with the shares offered at a price not less than 85 per cent of the fair market value or investor subscription cost plus a post-tax IRR of 25 per cent. In the absence of an IPO, the agreement also had a clause for buyback by the promoters at fair market value or such value-generating IRR of 25 per cent to SUN-Apollo.

According to a source, Rustomjee had approached the RBI, pursuant to which the central bank has issued a letter to the Rustomjee Group stating that such assured returns commitments and put options and related clauses being against the RBI’s policy on FEMA, are to be deleted from the shareholders’ agreement within the stipulated time, failing which the agreement needs to be terminated.